ECB to leave policy unchanged, but policy makers to feel the heat from surprisingly strong inflation
After yesterday’s euro area flash inflation data for January smashed all expectations, today’s Governing Council meeting might prove more eventful than had previously been expected. Admittedly, having announced significant policy amendments at the previous meeting, the ECB’s policy framework will be left unchanged. But the monetary policy statement and press conference will be closely watched, with the deterioration in the near-term inflation outlook clouding the monetary policy outlook. In the absence of updated projections, however, the Governing Council will reaffirm the expected profile for QE up to October. Net PEPP purchases will certainly still conclude at the end of March. And net APP purchases will still be expected to double to €40bn per month in Q2, before slowing to €30bn per month in Q3 and further to €20bn per month in October. But in her press conference, President Lagarde will acknowledge the significant uncertainty with respect to the likely path of inflation and thus repeat that the Governing Council stands ready to adjust policy if and when necessary. Nevertheless, she will likely reiterate that economic conditions in the euro area differ markedly from those in the US, and that – based on the December projections – the preconditions for rate hikes set out in the ECB’s forward guidance were unlikely to be met before the end of the year.

BoE to raise Bank Rate to 0.50% and announce the start of quantitative tightening
Unlike the ECB, following further upside surprises in the UK inflation data, today’s BoE MPC meeting looks firmly set to bring a change in policy. Bank Rate is highly likely to be hiked by 25bps to 0.50%. And assuming that threshold for Bank Rate is reached, the BoE’s guidance means that policymakers should also agree to start quantitative tightening, ceasing reinvestments of the proceeds of maturing bonds from its holdings starting with the redemption of £25bn of Gilts in March. The MPC will justify its decision to raise rates on the basis of its updated projections. Admittedly, the BoE’s forecasts for GDP in Q4 and Q1 will be revised down on account of the latest wave of coronavirus and associated restrictions in place over the festive period. And the Bank will be wary about the downside risks to private consumption growth over coming quarters from declines in real disposable incomes. But the MPC will continue to judge that there remains excess demand and that a period of softer demand growth is not inappropriate, particularly given that the labour market is very tight due to a drop in labour force participation and inflation has continued significantly to exceed expectations.

Japan services PMIs revised up from the flash, but still considerably lower than December
While today’s final Japanese services PMIs were stronger than initially thought in January, the underlying message of the survey was unchanged with services activity having been inevitably hit amid the surge in coronavirus cases last month. Indeed, despite being upwardly revised, the headline index declined 4.5pts to 47.6, a five-month low, with the new business component also down 4.3pts to 48.8, a four-month low, as demand weakened in the face of renewed restrictions. And so, the employment PMI implied the fastest pace of job shedding since May 2020, although firms suggested that this largely reflected non-replacement of voluntary leavers and retirements. Concerns surrounding the length of the pandemic dampened business optimism too, which fell to the lowest level since last August. But while firms still faced elevated cost burdens despite a modest drop in the input price PMI for the first time since August, today’s survey suggested that they largely absorbed these higher price pressures, with the output price PMI fall back to just 50.3. Of course, with conditions in the manufacturing sector holding up relatively well at the start of the year – the output PMI rose to 54.9, the highest for almost eight years – the composite PMI fell a somewhat smaller 2.6pts to 49.9, a four-month low, but nevertheless consistent with stagnation rather than significant contraction at the start of the year.

Euro area producer price inflation to rise to new eye-watering high; services PMIs to confirm a hit to activity from Omicron in January
After yesterday’s surprising increase in the euro area’s headline CPI inflation in January to a new high, today brings producer price inflation numbers for December. These are expected to report further significant price pressures up the pipeline not least due to higher energy costs, with prices expected to rise a further 2.8%M/M to leave the annual rate at 26.0%Y/Y, a new series high. Today will also bring the release of final January services and composite PMIs. The flash PMIs suggested that euro area economic activity slowed for a second successive month in January as the latest wave of coronavirus weighed on services activity. In particular, the euro area composite output PMI dropped 0.9pt in January to an eleven-month low of 52.4 with the fall entirely due to a near-2pt decline in the services activity index to a nine-month low of 51.2. Among the member states, the flash German survey pointed to a return to growth in services at the start of the year, but a much weaker performance in France. And while no detailed data were published for Italy and Spain, Markit suggested that growth in both countries had ground almost to a halt. In addition, the latest German car production and registrations numbers for January are also due and likely to report further recovery in the sector amid signs of easing supply chain pressures.

UK PMIs to confirm some stabilisation in activity at the start of the year
The final UK services and composite PMIs for January will likely align with the flash release to indicate some stabilisation in activity at the start of the year. The preliminary composite output PMI fell just 0.2pt in January to 53.4, a level still consistent with expansion. Admittedly, with certain pandemic-related restrictions in place throughout most of the month, consumer-facing sectors such as hospitality and travel reported extremely challenging conditions. But other sub-sectors, such as financial and business services, fared better. So, the overall services activity index edged down just 0.3pt to 53.3, similarly the lowest reading since February 2021.

US non-manufacturing ISM survey due today; jobless claims also of interest
Today brings several releases of note, including the latest non-manufacturing ISM survey. Following the decline in the flash PMIs – the headline services activity index fell 6.7pts to 50.9 – the headline ISM is expected to have slipped back in January due to the inevitable hit from Omicron. But similar to this week’s manufacturing ISM – which showed the output index at 58.9, compared with the Markit output PMI at 50.5 – expectations are still for the non-manufacturing ISM to remain at a still-historically elevated level of 59 suggestive of ongoing recovery. The latest weekly jobless claims numbers will be closely watched as will the Challenger job cuts figures ahead of Friday’s non-farm payrolls number. Separately, Fed governor nominees Sarah Bloom Rashin, Lisa Cook and Philip Jefferson will appear at a nomination hearing before the Senate.